Page 136 - Krugmans Economics for AP Text Book_Neat

5. Which of the following would decrease the effect of a quota on c. increase in demand
a market? A(n) d. price ceiling above the equilibrium price
a. decrease in demand e. none of the above
b. increase in supply

Tackle the Test: Free-Response Questions

1. Draw a correctly labeled graph illustrating hypothetical supply 2. Draw a correctly labeled graph of the market for taxicab rides.
and demand curves for the U.S. automobile market. Label the On the graph, draw and label a vertical line showing the level of
equilibrium price and quantity. Suppose the government an effective quota. Label the demand price, the supply price,
institutes a quota to limit automobile production. Draw a and the quota rent.
vertical line labeled “Q ineffective ” to show the level of a quota that
would have no effect on the market. Draw a vertical line labeled
“Q effective ” to show the level of a quota that would have an effect
on the market. Shade in and label the deadweight loss resulting
from the effective quota.

Answer (5 points)
Price
Deadweight
loss S

P E
E

D

Q effective Q E Q ineffective
Quantity
1 point: Correctly labeled supply and demand diagram (vertical axis labeled
“Price” or “P,” horizontal axis labeled “Quantity” or “Q,” upward sloping supply
curve with label, downward sloping demand curve with label)
1 point: Equilibrium at the intersection of supply and demand with the
equilibrium price labeled on the vertical axis and the equilibrium quantity
labeled on the horizontal axis
1 point: Vertical line to the right of equilibrium quantity labeled Q ineffective
1 point: Vertical line to the left of equilibrium quantity labeled Q effective
1 point: The triangle to the right of the effective quota line and to the left of
supply and demand shaded in and labeled as the deadweight loss

Section 2 Review

Summary

1. The supply and demand model illustrates how a com- 2. The demand schedule shows the quantity demanded
petitive market, one with many buyers and sellers of at each price and is represented graphically by a de-
the same product, works. mand curve. The law of demand says that demand
94 section 2 Supply and Demand